P2P Lending Platforms Revamp The Consumer Lending Industry

Peer-to-peer (P2P) lending, one of the hottest fintech industries, has experienced tremendous growth in the past five years and is expected to be worth US$150 billion by 2025, according to PwC.

After the financial crisis in 2008, P2P lending emerged as a new method for consumers to get loans easily and quickly, bypassing traditional banks that had tightening their consumer lending policies.

The model quickly grew in popularity, attracting borrowers with the new platforms’ perceived low interest rates, simplified application process, and quick leading decisions.

In 2014, an estimated US$5.5 billion worth of loans have been issued in the US alone with an average growth of 84% per quarter since 2007.

Growth has been largely influenced by technological breakthroughs and demographical shifts. Most particularly, the Millennial generation – those born between the early 1980s and the early 2000s – has set new standards in the financial services industry.

P2P lending and Millennials

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This demographic is demanding greater convenience, mobility, real-time update, and are using entirely different channels.

Tech-savvy and socially-minded, Millennials are changing the face of finance and have embraced fintech solutions. A recent report by Oracle and Wharton Fintech suggests a notable increase in the use of non-bank options by this demographic in solutions such as mobile wallets, mobile money and overall alternative payment solutions.

In the P2P lending area, Millennials are ten times more likely to use P2P lenders than those 50 and older, according to the Fair Isaac Corporation. The demographic is becoming a larger portion of the consumer loan market as they seek credit to finance major purchases or refinance their student debt.

“The Millennials are prime targets for P2P lending as they value the convenience of transacting online and are less loyal to banks,” according to PwC.

P2P lenders vs. banks

While the industry is experiencing strong growth, lending from large banks, on the other hand, has decreased dramatically. In the US, the ten largest banks lent US$44.7 billion in 2014, a drop of 38% from its peak of US$72.5 billion in 2006, according to Techcrunch.

That said, banks shouldn’t be afraid of these new players as P2P lenders “are unlikely to pose a threat to banks in the mass market,” according to Neil Tomlinson, Deloitte’s head of UK banking.

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In a report released earlier this year, the consulting firm argued that these new platforms “will not be significant players in terms of overall volume or share.” It said that P2P lenders cannot compete with banks in mainstream markets and should in fact focus on profitable niche segment markets where their knowledge can be a competitive advantage.

The report encourages banks to start collaborating with P2P lenders to deliver superior UX capability, maintain customer relationship, gain access to data to improve the bank’s risk scoring, as well as provide an option to under-served segments.

One Example of of this new players is US based player Kabbage, which provides revolving lines of credit to small business owners.

For these platforms, collaborating with banks would allow them to increase awareness among borrowers and investors, gain scale and lower their customer acquisition costs.

A number of banks have already teamed up with P2P lending startups: JP Morgan Chase provides loans to its SME customers using OnDesk’s platform; Metro Bank deploys customer deposits through Zopa; and RBS and Santander UK are both regering SME customers rejected for a loan to Funding Circle.

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